Tracking changes in Warren Buffett's portfolio might just be one of the most enjoyable activities in investing. The celebrated investor has made billions by sticking to some pretty straightforward strategies.
One of the industries that Buffett tends to prefer is financial services. Three of his longest-tenured holdings are payment processors American Express, Visa, and Mastercard.
While it's easy to understand why these blue chip brands have earned coveted positions in Buffett's exclusive portfolio, keep in mind that the payments sector has global appeal. For this reason, despite the broad reach of the companies above, there is always a possibility for disruption.
One of Buffett's lesser-known financial services positions is Nu Holdings (NU 3.33%), a digital banking platform focused on Latin America. During the past year, shares in the budding fintech nearly doubled. Nevertheless, the company's progress and addressable market suggest that the shares could continue soaring.
Let's dig into why Nu could be such a compelling investment for long-term investors.
NYSE: NU
Key Data Points
The banking landscape in Latin America is ready for disruption
While online banking is becoming more popular around the world, the concept is not yet mainstream for many developing nations.
Nu primarily operates in three markets: Brazil, Colombia, and Mexico. One common denominator among these three nations is the high number of underbanked consumers. Traditional financial services such as obtaining a loan or even simply depositing money at a bank can be a challenge.
Nu has swiftly taken note of these market frictions and the company's results underscore just how large and untapped its opportunities are. During the third quarter, Nu increased its customer base by 27% year over year -- boasting 89.1 million users on its platform.
The table below illustrates how this user growth has translated into revenue, and more importantly, profits.
| Category | Q3 2022 | Q4 2022 | Q1 2023 | Q2 2023 | Q4 2023 |
|---|---|---|---|---|---|
| Revenue | $1.3 billion | $1.5 billion | $1.6 billion | $1.9 billion | $2.1 billion |
| Net income | $7.8 million | $58 million | $141.8 million | $224.9 million | $303 million |
Data source: Nu Holdings investor presentation.
One of the reasons Nu has been able to accelerate revenue growth and begin generating sustained profitability is its ability to cross-sell. The company's monthly average revenue per active customer increased 18% year over year during the third quarter -- from $7.9 in Q3 2022 to $10 in Q3 2023.
But even with such robust growth, investors may be keen to learn that the company only has 51% market penetration among the adult population in Brazil. Clearly there is still lots of untapped potential in the company's core market -- and it's seeking to parlay this template to other areas in Latin America.
Image source: Getty Images.
The stock trades at an attractive valuation
NU PS Ratio (Forward) data by YCharts
The chart above benchmarks Nu stock against a host of Latin American digital commerce platforms on a forward price-to-sales (P/S) basis. Interestingly, Nu's forward P/S of 3.9 is right in the middle of this peer group.
To be sure, the company's forward price-to-earnings ratio of 27 is higher than that of the S&P 500's 21.7. Given its rock-solid performance in 2023 and the long-term potential fueled by higher digital payments adoption rates across Latin America, I think it's appropriate for Nu stock to earn a premium over that of the broader market.
Nu appears well positioned to continue penetrating its target markets. Yet despite its rapid revenue and profit growth, I see Nu as still relatively unknown.
Given Buffett has owned the stock for a few years now, Nu might just represent the next Visa or American Express for the Berkshire Hathaway portfolio. Now looks like a terrific time to begin dollar-cost averaging into this under-the-radar growth stock for long-term investors.
